Compiled Notes in EE40

MODULE 1
Definition of Terms
Engineering Economy uses mathematical formulas to account for the time value of money and
to balance current and future revenues and costs.
Economics is the science that deals with the production, allocation and use of goods and
services. The two major subdivisions of economics are:
a.
Macroeconomics is the study of the entire system
b.
Microeconomics is the study of how the systems
the economic system.
of economics.
affect one business or parts of
Necessities and Luxuries
Necessities are products or services that are required to support human and activities that will
be purchased in somewhat the same quantity even though the prices vary considerably.
Luxuries are products and services that are desired by humans and will be purchased if money
is available after the required necessities have been obtained.
Consumer and Producer

Goods and Services
Goods is defined as anything that anyone wants or needs.

Services would be the performance of any duties or work for another; helpful or professional
activity.
Marketing refers to the distribution of goods and services.
Marketing a Product refers to the advertising, and other efforts to promote a products sale.
Different Types of Goods
1.
Consumer Goods are those such as food and clothing that satisfy human wants and needs.
2.
Producer Goods are those such as raw

goods.
3.
Capital Goods are the machinery, used in the production of commodities in producer goods.
materials and tools, used to make consumer
Supply and Demand
Supply refers to how many of a certain good or services are available for people to purchase.
Demand means how many people wish to buy that good or service.
Law of Supply and Demand
Under conditions of perfect competition, the price at which a given product will be supplied and
purchased is the price that will result in the supply and demand being equal.
Demand
Demand it refers to the peoples willingness to buy a product or service.

Demand Curve is the plot or graph of the quantity demanded versus the price.
Demand Schedule is the schedule or table listing of the quantity demanded with the
corresponding price.
1.
a
Types of Demand
Elastic Demand exists when there is a greater change in quantity demanded as a response to
change in price.
2.
Inelastic Demand exists when there is a lesser
response to a change in price.
change in quantity demanded as a
3.
Unitary Demand exists when there is an equal
(increase or
decrease).
change in price and quantity demanded
Factors that Influence Demand
Factors that Influence Demand are:

1.
Income
2.
Population
3.
Taste and preference
4.
Price Expectation
5.
Price of Related Goods
Supply
Supply it is the willingness of a producer to manufacture goods.

Supply Curve is the plot or graph of the quantity supplied versus the price.
Supply Schedule is the schedule or table listing of the quantity supplied with the
corresponding price.
Factors that Influence Supply
Factors that Influence Supply are:

1.
Price of Goods
2.
Cost of Production
3.
Availability of Resources
4.
Number of Producer and Sellers
5.
Technological Advancement
6.
Taxes
7.
Subsidies
Relationship of
Supply and Demand
Shortage the supply is less than the demand.

Surplus the supply exceeds the demand.
Equilibrium Point the supply is equal to the demand.
Market Structures
Market is the place where the vendors and buyers meet to transact.
Perfect Competition occurs in a situation where a commodity or service is supplied by a
number of vendors and there is nothing to prevent additional vendors entering the market.
Perfect Monopoly exist when a unique product or services is available from a single vendor
and that the vendor can prevent the entry of all others into the market.
Oligopoly exist when there are so few suppliers of a product or service that action by one will
almost inevitably result in similar action by the others.
MODULE 2
Module 2
INTEREST & MONEY TIME RELATIONSHIPS
Simple Interest
Interest is the return on capital or cost of using capital. It is the amount of money paid for the
use of borrowed capital or the income produced by money, which has been loaned.
Simple Interest is calculated using the principal only, ignoring any interest that had been
accrued in preceding period.
Types of Simple Interest
1.
Ordinary Simple Interest simple interest in which it is assumed that each month
contains 30 days and consequently each year has 360 days.
1 month = 30 days
1 year = 360 days (bankers year)
2.
used.
Exact Simple Interest simple interest in which the
exact number of days per month is
1 ordinary year = 365 days

1 leap year = 366 days
Sample Problems on
Simple Interest
1. A loan of Php50,000 is made for a period of 13 months, from April 1 to April 30 of the following
year, at a simple interest rate of 20%. What future amount is due at the end of the loan period?
2. What is the principal amount if the amount of interest at the end of 2 years is Php450 for a
simple interest rate of 6% per annum?
3. Determine the exact simple interest of Php25,000 for the period of December 27, 2002 to
March 23, 2003, if the rate of interest is 10%.
4. What is the interest due on a Php1,500 loan for 4 years and three months if it bears 12%
ordinary simple interest?
5. Determine the exact simple interest of Php4,000 for the period of Feb. 14, 1984 to November
30, 1984, if the rate of interest is 18%.
Compound Interest
Compound Interest the interest for an interest period is calculate on the principal plus total amount of
interest accumulated in the previous period. Compound interest means the interest on top of
interest.
Rates of Interest
Rate of Interest it is the cost of borrowing money.

Nominal Rate of Interest it specifies the rate of interest and a number of interest periods in
one year.
Effective Rate of Interest it is the actual or exact rate of interest on the principal during one
year.
Values of m
m = 1 for compounded annually (every 12 months)

m = 2 for compounded semi-annually (every 6 months)
m = 4 for compounded quarterly (every 3 months)
m = 6 for compounded bi-monthly (every 2 months)
m = 8 for compounded semi-quarterly (every 1 1/2 months)
m = 12 for compounded monthly (every month)
m = 24 for compounded semi-monthly (every 1/2 month)
F/P and P/F Factors:

Notation and Equations
Sample Problems on Compound Interest
1.
What rate of interest compounded annually must be received if an investment of Php5,400
made now will result in a receipt of Php7,200 5 years hence?
2.
What amount will be accumulated by Php4,100 in 10 years at 6% compounded annually?
3.
What effective annual interest rate corresponds to the following situations?

a.
nominal interest rate of 10% compounded semi-annually
b.
nominal interest rate of 6% compounded monthly
c.
nominal interest rate of 8% compounded quarterly
4. How much should Engr. Cruz deposit now, if after 10 years, this will amount to Php100,000.
Interest rate is 12% compounded semiannually?
5.
If Php1,000 becomes Php5,734 after 15 years, when invested at an unknown rate of interest
compounded semi-annually, determine the unknown nominal rate and corresponding effective rate.
Cash Flow Diagram
Cash Flow Diagram depicts the timing and amount of expenses (negative, downward) and
revenues (positive, upward) for engineering projects.
Types of Cash Flow Diagrams
Equation of Value
An equation of value is obtained by setting the sum of the values on a certain comparison or local date
(or focal date) of one set of obligations equal to the sum of the values on the same date of another set
of obligations.
Sample Problems on
Equation of Value
1.
Jay wishes his son, Jason, to receive Php1,000,000 twenty years from now. What amount should
he invest now, if it will earn interest of 12% compounded annually during the first five years and 10%
compounded monthly for the remaining years.
2. Find the present worth of a future payment of Php300,000 to be made in 10 years with an
interest rate of 10% compounded annually. What will be the amount if it will be paid 5 years
later (on the 15th year)?
Discrete Payments
The solution of discrete payments or number of transactions occurring at different periods is taking each
transaction to the base year and equating each value.
Sample Problems on
Discrete Payments
1. Acosta Holdings borrowed Php9,000 from Smith Corporation on January 1, 1998 and Php12,000
on January 1, 2000. Acosta Holdings made a partial payment of Php7,000 on January 1, 2001. It
was agreed that the balance of the loan would be amortized by two payments, one on January
1, 2002 and one on January 1, 2003, the second being 50% larger than the first. If the interest
rate is 12%, what is the amount of each payment?
2. A contract has been signed to lease a restaurant at Php20,000 per year with annual increase of
Php1,500 for 8 years. Payments are to be made at the end of each year, starting one year from
now. The prevailing rate is 7%. What lump sum paid today would be equivalent to the 8 year
lease program?
3. Mr. Cruz buys a second hand car worth Php150,000 if paid in cash. On installment basis, he pays
Php50,000 downpayment, Php30,000 at the end of one year, Php40,000 at the end of two years
and a final payment at the end of four years. Find the final payment if interest is 14%.
Continuous
Compounding Interest
The solution for interest compounded continuously can be derived thru differential equations and can
be found as:
Sample Problems on
Continuous Compounding Interest
1.
Philip invested $100 on a bank. The bank offers 5% interest compounded continuously in a
savings account. Determine (a) how long will it require for him to earn $5 (b) the equivalent simple
interest rate for 1 year of the bank.
2.
Which is more advisable to invest Php5,000 for five (5) years, to bank A that offers 5%
compounded continuously or to bank B that offers 10% simple interest?
Bankers Discount
Certain banks lend money in such a way that they deduct the interest on the money. They actually dont
lend you money you asked for. This type of computing money is called bankers discount. The money
received by the borrower after the discount has been deducted is called proceeds.
Sample Problems on
Bankers Discount
1.
Ms. Glydel Marquez borrowed money from a bank. She received from the bank Php1,342 and
promised to repay Php1,500 at the end of 9 months. Determine the following: (a) simple interest rate
(b) discount rate or often referred as Bankers discount.
Module 3
ANNUITY
Annuity
Annuity it is a series of equal cash flows occurring each period over a range of periods.
Types of Annuity:
1.
Ordinary Annuity
2.
Deferred Annuity
3.
Annuity Due
4.
Perpetuity
Ordinary Annuity
P/A and A/P Factors:

F/A and A/F Factors:

Sample Problems on
Ordinary Annuity
1.
What is the current value of a $50 payment to be made at
the end of each of the next
three years if the prevailing
rate of interest is 7% compounded annually?
2.
An obligation of Php20,000 is to be repaid in uniform annual amounts each of which included
repayment of the
debt and interest over a period of 5 years. If interest is 10% per year, what is
the annual payment?
3.
Maintenance cost for a small bridge expected to last for 60
years is estimated to be
Php1,000 each for the first 5
years, followed by a Php10,000 expenditure in the 15th year and
th
Php10,000 in the 30 year. If interest is 10%
per year, what is the equivalent uniform annual cost
over the 60 year period?
Sample Problems on
Ordinary Annuity
4.
What is the equivalent previous worth of Php500
years 72 years ago, if annual interest is 1%?
annuity to be paid constantly in 60
5.
Find the annual payment to extinguish a debt of
interest.
Php10,000 payable for 5 years at 12%
6.
A savings loan is made between a man and banker. What
should be the uniform monthly
payment that the man should make if he is to borrow Php50,000 and he is to pay
in 10 years?
Interest is taken as 6% compounded
quarterly.
7.
What annuity is required over 10 years to equate with the future amount of Php15,000.
Assume i = 5%.
Deferred Annuity
Deferred Annuity are annuities that are computed on different present year and/or future year. It is
annuity where the first payment is made several periods after the beginning of the annuity.
Methods of Solving
Deferred Annuity Problems
1.
Draw the cash flow diagram.
2.
Select any convenient focal date.
Temporary focal date is used to convert deferred annuity to
Final focal date is used to obtained the required value.
3.
Project all values to temporary focal date.
4.
Obtain the final value.
ordinary annuity
Sample Problems on
Deferred Annuity
1.
Find the value of x in the cash flow diagram, given
that would make the equivalent present
worth of the cash flow diagram to Php22,000 and interest rate is
at 13% per year.
Sample Problems on
Deferred Annuity
2.
Determine the uniform annual payments which would be equivalent to the cash flow diagram
given. Interest rate of 12% per year.
Annuity Due
Annuity Due is a series of equal payments or receipts occurring over a specified number of periods
with the payments or receipts occurring at the beginning of each period.
Sample Problems on
Annuity Due
1.
What is the current value of a $50 payment to be
made at the beginning of each year, for
three years if the prevailing rate of interest is 7% compounded
annually?
2.
What is the accumulated value of a $25 payment to
be
of the next three
years if the prevailing rate of interest is 9%
made at the beginning of each

compounded annually?
Perpetuity
Perpetuity are uniform payments which are done infinitely. It is also called as perpetual
annuity.
Types of Perpetuity
1.
Ordinary Perpetuity first payment is done one period after the focal date.
2.
Deferred Perpetuity first payment is done several periods after the focal date.
Sample Problems on
Perpetuity
1.
How much should Mr. Sy invest on a bank that offers
Php1,000 each year in perpetuity.
10% interest so that he would earn
2.
Don Jose deposited Php5,000,000 on a bank that
earns 10% compounded annually. Five
years later he died. His will states that his beneficiary is an
orphanage which will be receiving the
money in
perpetuity a year after he died. How much is the yearly fund the orphanage will be
receiving?
3.
If money is worth 8% compounded quarterly, compute the present value of the perpetuity of
Php1,000
payable quarterly.
Module 4
DEPRECIATION
Definition of Terms
Depreciation it is the decrease in the value of a fixed asset, or the value of physical property,
with the passage of time.
Value is the present worth of all the future profits that are to be received through the
ownership of a particular property.
Market Value of a Property is the amount, which a willing buyer will pay to a willing seller for
the property where each has equal advantage and is under no compulsion to buy and sell.
Definition of Terms
Utility or Use Value of Property is what the property is worth to the owner as an operating
unit.
Fair Value is the value which is usually determined by the disinterested third party in order to
established a price that is fair to both seller and buyer.
Book Value is the worth of the property as shown in the accounting records of an enterprise.
It is sometimes called as depreciated book value.
Salvage or Resale Value is the price that can be obtained from the property after it has been
used. Salvage Year is the year when scrap value is equal to book value.
Scrap Value or Junk Value is the price that can be recovered if an asset is disposed as a junk.
Purposes of Depreciation
1.
To provide for the recovery of capital
2.
To enable the cost of depreciation to be

charged to the cost of producing
products or services that results from the use of property.
which has been invested in physical
property.
Causes of Depreciation
Physical Depreciation it is due to wear and tear of the asset.

Functional Depreciation it is due to the obsolescence of the asset.
Depletion refers to the decrease in the value of a property due to the gradual extraction of its
contents.
Monetary Depreciation depreciation due to changes in price level.
Physical and Economic Life
Physical Life of a Property is the length of time during which it is capable of performing the
function for which it was designed and manufactured.
Economic Life or Useful Life is the length of time during which the property may be operated
at a profit.
Methods Used to
Determine Depreciation
1.
Straight Line Method
2.
Declining Balance Method
3.
Double Declining Balance Method
4.
Sum-of-Years Digit Method
5.
Sinking Fund Method
6.
Hour Output Method
7.
Service Output Method
Straight Line Method
The straight line method is the simplest way in computing for depreciation. In this method, the
depreciation each year is constant and the interest rate is being neglected.
Sample Problems
on Straight Line Method
1.
Prepare a depreciation table for an asset which was
bought at Php15,000 and useful for a
period of 5 years.
Estimated salvage value is 10% of its original cost.
2.
Equipment bought for Php60,000 is expected to last for 30
years. If the book value after 20
years is Php20,000, how
much is the depreciation each year? Find the book value
after 10
years.
3.
A machine which costs Php10,000 was sold as scrap
after being used for 10 years. If the
scrap value was
Php500, determine the total depreciation and book value
at the end of
th
the 5 year.
Sample Problems
on Straight Line Method
4.
Delivery jeeps purchased by KH Company cost Php180,000 each. Past records indicate that
jeeps should have an economic life of 10 years. They can be sold from
an average of
Php50,000 each year after 10 years of use.
The company receives 9% interest on investment funds.
Using straight line method:
Determine:
a.
the depreciation charge during 3 years
b.
the depreciation reserve accumulated at the end of 3
C.
book value at the end of 3 years.
years
Declining Balance Method or Reducing Balance Method
In this method, the net book value at the end of each period can be simply computed by multiplying the
original market price by a fix percentage repeatedly until it reaches the salvage value. This method is
also called Mathesons Formula.
Sample Problems on
Declining Balance Method
1.
A machine worth Php800,000 is bought from China.
Freight charges amount to Php200,000.
If the scrap
value of the machine is Php50,000 that occurs at
the end of 17 years. Compute
(a) the depreciation
and (b) book value at the end of 11 years.
2.
Equipment bought for Php60,000 is expected to last
years is Php20,000. How much is the depreciation for year
for 30 years. If the scrap value after 20

10?
Double Declining
Balance Method
This is the same as declining balance method except that k is replaced by 2/n.
Sample Problem on Double Declining Balance Method
A plant bought a calciner for Php220,000 and used it for 10 years, the life span of the equipment. What
is the book value of the calciner after 5 years of use? Assume a scrap value of Php20,000 for straight-line
method; Php22,000 for declining balance method and Php20,000 for double-declining balance method.
Sum-of-Years Digit Method
This method uses the years digit (in reverse order) in computing for the depreciation.
Sample Problem on
Sum of Years Digit Method
An industrial plant bought a generator set for Php90,000. Other expenses including installation
amounted to Php10,000. The generator set is to have a life of 17 years with a salvage value at the end of
life at Php5,000. Determine the depreciation charge during the 13th year and the book value at the end
of 13 years by:
(a)
Declining balance method
(b)
Double declining balance method
(c)
Sum-of-Years digit method
Sinking Fund Method
Sinking fund method presents the idea of annuity in computing for the depreciation. The interest rate
for the worth of money is being considered so as to have the depreciable value.
Sample Problem
on Sinking Fund Method
A broadcasting company purchased an equipment for Php53,000 and paid Php1,500 for freight and
delivery charges to the job site. The equipment has a normal life of 10 years with a trade-in value of
Php5,000 against the purchase of a new equipment at the end of the life. Determine the annual
depreciation cost using:
(a)
straight line method
(b)
sinking fund method assuming interest is
6% compounded annually
Hour Output method
In this method, the functionality period and the period the machine has been used is considered.
Depreciation is computed based on the wear and tear of the machine.
Service Output method
Similar to the hour output method, this method based its computation on how much the asset has been
used.
Sample Problems on
Service and Hour Output Method
1.
An electric bulb bought for Php100 is guaranteed to be useful for 50 hours. A certain company
uses the said bulb for 10 hours a day. If there is no scrap value for the
bulb. Compute the daily
depreciation and create the
depreciation table throughout its economic life.
2.
A tire bought for Php1,000 is expected to be useful in traveling 100 km after which it can be
sold as scrap for
Php50. (a) If the pedometer displays a value of 85 km, what is the book value
of the tire? (b) How much did the
owner need to travel for the tire to amount to Php80?
Module 5
BREAK-EVEN ANALYSIS
Definition of Terms
Break-Even Analysis it involves estimating the level of sales necessary to operate a business
on a break-even basis.
Break-Even Point (BEP) is defined as the point where sales or revenues equal total expenses.
Break-Even Margin is a ratio that shows the gross-margin factor for a break-even condition.
The formula is total expenses divided by net revenues multiplied by 100 to get a percentage.
Break-Even Graph
Break-Even Chart shows the graph of fixed cost, variable cost and expected income from sales for
different production levels.
Ways to Lower the

Break-Even Point
Lower direct costs, which will raise the gross margin.

Exercise cost controls on your fixed expenses, and lower the necessary total expenses.
Raise prices.
Key Break-Even Factors
Fixed Costs these costs remain constant (or nearly so) within the projected range of sales
levels. These can include facilities costs, certain general and administrative costs, and interest
and depreciation expenses.
Variable Costs these costs vary in proportion to sales levels. They can include direct material
and labor costs, the variable part of manufacturing overhead, and transportation and sales
commission expenses.
Contribution Margin this is equal to sales revenues less variable costs. This amount is available
to offset fixed expenses and (hopefully) produce an operating profit for the business.
Appraisal of Break-Even Analysis
Advantages of Break-Even Analysis

It points out the relationship between cost, production volume and returns.
Limitations of Break-Even Analysis
It is best suited to the analysis of one product at a time.
It may be difficult to classify a cost as all variable or all fixed.

There may be a tendency to continue to use a break-even analysis after the cost and income
functions have changed.
Sample Problems on
Break Even Analysis
1.
An entrepreneur at the location in the United States is planning to enter the gourmet soy-based
burger market. The forecast expected unit sales of 200,000 burgers in 18 months. The variable cost for
making one burger is $0.85 and the fixed cost of making burgers for 18 months will be a total of
$165,000 which covers for the rent, phone bill, and insurance coverage these items tend not to vary in
amount per month over the term of one year. The best estimate of what the average consumer will pay
for the soy burger is $1.95. How many burgers will he have to sell to break even?
Sample Problems on
Break Even Analysis
2.
Toyota Motor Phils. Corporation Sta. Rosa Plant has
a production capacity of 700 cars per
month and its fixed cost is Php100,000,000 monthly. The variable
cost per car is Php300,000 and
each car can be sold
for Php650,000. Due to cost reduction program, fixed cost will be reduced to
10% and variable cost by 20%. Determine the new and old break break-even point.
Sample Problems on
Break Even Analysis
3.
A farmer wants to buy a new combine rather than hire a custom harvester. The total fixed
costs for the desired combine are $21,270 per year. The variable
cost (not counting the
operators labor) are $8.75 per hour. The farmer can harvest 5 acres per hour. The
custom
harvester charges $16.00 per acre. How
many acres must be harvested per year to
breakeven?
Module 6
COMPARISON OF ALTERNATIVES
Definition of Terms
1.
Comparison of Alternatives deals with situations in which one
has more than one
choice and using engineering economic principles, one needs to decide between the alternatives so as
to go with the one that is most economically justified.
2.
Methods used in the Selection of Alternatives
Present Worth Method
Annual Cost/Worth Method
Equivalent Uniform Annual Cost (EUAC) Method
Rate of Return (ROR) Method
Payback (Payout) Period Method
Capitalized Cost
Benefit/Cost Ratio Analysis
This method involves finding the equivalent value of each alternative at the present time, identified as
time 0. If only costs are involved, we can select the alternative with the smallest present worth of costs.
If cost and revenues are involved, we select the alternative with the greatest present worth on net
revenues.
To perform present worth or annual worth analysis, an interest rate and a study period must be
specified. The interest rate is usually the minimum acceptable rate of return (MARR) of the
organization.
Present worth analysis can only be used when the alternatives have the same lives. If the
alternatives have different lives, some mechanism must be used to compare them over the common
study period.
Sample Problems on
1.
Motors from two different manufacturers are being
considered for application. Both motors
are 50 HP, 460 volts, 3-phase, 60 Hz, but motor A operates
at
80% efficiency whereas motor B
operates at 88%
efficiency. The expected used for motors are 20 years. Motor A costs
Php600,000 and motor B costs Php750,000. Electrical energy cost Php3.00 per kW-hr and the motors
will be operated at 8 hours per day,

250 days per year. Assume taxes are 5% and rate of
is 10%. Which motor is purchased? Also, life of both motors is 15 years.
interest
Sample Problems on
1.
Motors from two different manufacturers are being considered for application. Both motors
are 50 HP, 460 volts, 3-phase, 60 Hz, but motor A operates at 80%
efficiency whereas motor B
operates at 88% efficiency. The expected used for
motors are 20 years. Motor A costs Php600,000
and motor B costs Php750,000. Electrical energy cost Php3.00 per kW-hr and the motors will be
operated at 8 hours
per day, 250 days per year. Assume taxes are 5% and rate of interest is 10%.
Which motor is purchased? Also, life of both motors is 15 years.
Sample Problems on
2.
Perform a present worth analysis of equal service
machines with the costs shown below,
if the MARR is 10% per year. Revenues for all three alternatives are
expected to be the same.
Sample Problems on
2.
Perform a present worth analysis of equal service machines with the costs shown
below,
Sample Problems on
3.
A project engineer with EnvironCare is assigned to start up a new
office in a city where a
6 year contract has been finalized to take
and analyze ozone-level readings. Two lease options are
available, each with a first cost annual lease cost, and deposit- return estimates shown below.
Rate of interest is 15%.
Sample Problems on
3.
A project engineer with EnvironCare is assigned to start up a new office in a city where a
6 year contract has been finalized to take and analyze ozone-level readings. Two lease options
are available, each with a first cost annual lease cost, and deposit-return
estimates shown
below. Rate of interest is 15%.
Annual Cost (Worth) Method
The annual worth method involves finding the equivalent end-of-period value of each alternative. The
periods are usually in years. If only costs are involved, we can select the alternative with the smallest
equivalent uniform annual cost (EUAC) or net annual cost (NAC). If costs and revenues are involved, we
can select the alternative with the greatest equivalent uniform annual benefit, or net annual worth
(NAW).
If two alternatives have the same annual worth, then the one with the greatest investment is
preferred. The extra investment makes exactly the required MARR.
Annual Cost (Worth) Method
Problems that can be solved by the present worth method can also be solved by the annual
worth method. An annual worth analysis is sometimes preferred over a present worth analysis because
people think better in terms of annual amounts than an equivalent amount to time zero. Both methods
yield the same results.
Annual worth analysis is the easiest method when the alternatives have different lives. No
specific study period need be specified, but the implicit assumption that the alternative are compared
over the least common multiple of the lives.
Sample Problems on
Annual Worth Method
1.
at
operates at 88%
interest
Sample Problems on
Annual Worth Method
1.
operated at 8 hours
Sample Problems on
Annual Worth Method
2.
Perform an annual worth analysis of equal service
if the MARR is
10% per year. Revenues for all three
the same.

alternatives are
expected to be
Sample Problems on
Annual Worth Method
2.
below,
Sample Problems on
Annual Worth Method
3.
A project engineer with EnvironCare is assigned to start up a new office in a city where a 6 year
contract has
been finalized to take and analyze ozone-level readings. Two lease options are available,
each with a first cost annual lease cost, and deposit-return estimates shown below. Rate of interest
is 15%.
Sample Problems on
Annual Worth Method
3.
estimates shown
Equivalent Uniform
Annual Cost (EUAC) Method
In this method, all cash flow (irregular or uniform) must be converted to an equivalent uniform
annual cost, that is, a year-end amount which is the same each year. The alternative with the least EUAC
is preferred. When the EUAC method is used, the EUAC of the alternatives must be calculated for one
life cycle only. This method is flexible and can be used for any type of alternative selection problems.
The method is a modification of the annual cost method.
Sample Problems on
Equiv. Uniform Annual Cost Method
1.
at
operates at 88%
interest
Sample Problems on
1.
operated at 8 hours
Sample Problems on
2.
Perform an equivalent uniform annual cost analysis of equal service machines with the costs
shown below, if
the MARR is 10% per year. Revenues for all three
alternatives are
Sample Problems on
2.
below,
Sample Problems on
3.
contract has
is 15%.
Sample Problems on
3.
estimates shown
If
ROR > MARR, select the alternative with the bigger investment
ROR < MARR, select the alternative with the smaller investment
The rate of return on the capital invested is
Sample Problems on
Rate of Return Method
1.
at
operates at 88%
interest
Sample Problems on
1.
operated at 8 hours
Sample Problems on
2.
Perform an annual worth analysis of equal service
if the MARR is
10% per year. Revenues for all three
the same.

alternatives are
expected to be
Sample Problems on
2.
below,
Sample Problems on
2.
below,
Sample Problems on
3.
contract has
is 15%.
Sample Problems on
3.
estimates shown
Sample Problems on
4.
A firm is considering purchasing equipment that will
reduce costs by Php40,000. The
equipment costs
Php300,000 and has a salvage value of Php50,000
and a life of 7 years.
The annual maintenance cost is Php6,000. While not used by the firm, the equipment can be rented
to others to generate an income of
Php10,000 per year. If money can be invested for an
8%
return, is the firm justified in buying the
equipment?
Sample Problems on
4.
A firm is considering purchasing equipment that will reduce costs by Php40,000. The
equipment costs Php300,000 and has a salvage value of Php50,000 and a life of 7 years. The
annual maintenance cost is Php6,000. While not used by the firm, the equipment can be rented to
others to generate an income of Php10,000 per year. If money can be invested for an 8% return, is the
firm justified in buying the equipment?
Payback (Payout) Period Method
In this method, the payback period of each alternative is computed. The alternative with
shortest payback period is adopted. This method is seldom used.
Payback Period is the length of time required to recover the first cost of an investment from the net
cash flow produced by that investment for an interest rate of zero.
Sample Problem on
Payback Period Method
In a marble block quarrying operation, hand rock drills, costing Php50,000 each, are used. It has
a drilling rate of 10 cm per minute, produces 10 cubic meters of block per month and consumes 60 liters
of diesel fuel for compressor drive, per rock drill per cubic meter produced utilizing 1 worker per drill.
A modern equipment quarry bar mounted rock drill is being offered for Php180,000 per unit and
has a drilling rate of 60 per minute that will produce 60 cubic meters of block per month, but consumes
120 liters of diesel fuel for the compressor drive, per 6 cubic meters of block utilized, utilizing 2 workers
per quarry bar drill.
Consider diesel fuel at Php6.00 per liter at the quarries, worker earning Php80.00 per day, 25
days per month, 5 years life of both drills with 20% salvage value, neglecting cost of money, other cost
at Php500 per cubic meter and marble blocks sold at Php2,000 per cubic meter. Would you recommend
the purchase of the new equipment?
Sample Problem on
Payback Period Method
In a marble block quarrying operation, hand rock drills, costing Php50,000 each, are used. It has
a drilling rate of 10 cm per minute, produces 10 cubic meters of block per month and consumes 60 liters
of diesel fuel for compressor drive, per rock drill per cubic meter produced utilizing 1 worker per drill.
A modern equipment quarry bar mounted rock drill is being offered for Php180,000 per unit and
has a drilling rate of 60 per minute that will produce 60 cubic meters of block per month, but consumes
120 liters of diesel fuel for the compressor drive, per 6 cubic meters of block utilized, utilizing 2 workers
per quarry bar drill.
Consider diesel fuel at Php6.00 per liter at the quarries, worker earning Php80.00 per day, 25
days per month, 5 years life of both drills with 20% salvage value, neglecting cost of money, other cost
at Php500 per cubic meter and marble blocks sold at Php2,000 per cubic meter. Would you recommend
the purchase of the new equipment?
Capitalized Cost
Capitalized Cost is the present worth of an alternative that will last forever. Public sector projects
such as bridges, dams, irrigation systems and railroad fall into this category.
Sample Problems on
Capitalized Cost
Two methods of conveying eater are being studied. Method A requires a tunnel, first cost Php180,000,
life perpetual, annual operation and upkeep is Php3,000. Method B requires a ditch plus flume; first cost
of ditch is Php40,000, life perpetual, annual depreciation and upkeep is Php1,500, first cost of flume is
Php30,000, life 10 years, salvage value is Php5,000, annual operation and upkeep is Php4,000. If money
is worth 6%, determine which method is to be recommended?
Sample Problems on
Capitalized Cost
Two methods of conveying eater are being studied. Method A requires a tunnel, first cost Php180,000,
life perpetual, annual operation and upkeep is Php3,000. Method B requires a ditch plus flume; first cost
of ditch is Php40,000, life perpetual, annual depreciation and upkeep is Php1,500, first cost of flume is
Php30,000, life 10 years, salvage value is Php5,000, annual operation and upkeep is Php4,000. If money
is worth 6%, determine which method is to be recommended?
Benefit/Cost Ratio Analysis it is the most commonly used method by government agencies for
analyzing the desirability of public projects.
If B/C 1.0, accept the project as economically acceptable for the estimates and discount rate
applicable.
Cost estimated expenditures to the government entity for construction, operation, and
maintenance of the project less any expected salvage value.
Benefits advantages to be experienced by the owners, the public.
Disbenefits expected undesirable or negative consequences to the owners if the alternative is
implemented. Disbenefits may be indirect economic disadvantages of the alternative.
The benefit cost ratio on the capital invested is
Significant Differences in the Characteristics of Public and Private Sector Alternatives
Sample Problems on
1.
The National Government intends to build a dam
and hydroelectric project in the
Cagayan Valley at
a total cost of Php455,500,000. The project will be
financed by soft foreign
loan with an interest of 5%
per year. The annual cost for operation, maintenance, distribution,
facilities and others

be Php56,500,000.
would total Php15,100,000. Annual revenues
If the structures are expected to last for 50

project economically acceptable?
and benefits are estimated to
years with no salvage value, is the
Sample Problems on
1.
The National Government intends to build a dam and hydroelectric
project in the Cagayan
Valley at a total cost of Php455,500,000. The
project will be financed by soft foreign loan with an
interest of 5% per year. The annual cost for operation, maintenance, distribution, facilities and others
would total Php15,100,000. Annual revenues and benefits are estimated to be Php56,500,000.
If the structures are expected to last for 50 years with no salvage
project economically acceptable?
value, is the
Sample Problems on
2.
Two routes are under construction for a new highway. Route A would be located about 5
miles from the central business district and would
require longer travel distances by local
commuter traffic. Route B would
pass directly through the downtown area and although its
construction cost would be higher, it would reduce the travel time
and distance for local
commuters. The costs for the two roads are as follows:
Sample Problems on
2.
Two routes are under construction for a new highway. Route A would be
located about 5
miles from the central business district and
would require longer travel
distances by local
commuter
traffic. Route B would pass
directly through the downtown area and although its
construction cost would be
higher, it would reduce the
travel time and distance for
local commuters. The costs for the two roads are as
follows:
Sample Problems on
3.
Four alternatives for providing electric power supply to
identified with the following annual benefits and costs:
a small town have been
Sample Problems on
3.
Four alternatives for providing electric power supply to a small town have been identified with
the following annual benefits and costs:
Module 7
CAPITAL FINANCING
Equity and Borrowed Capital
Equity Capital or Ownership Forms are those supplied and used by the owners of an
enterprise in the expectation that profit will be earned.
Borrowed Funds or Capital are those supplied by others on which a fixed rate of interest must
be paid at a specified time.
Types of Business Ownership
Individual Ownership or Sole Proprietorship is one which is owned and run by one individual
and where there is no legal distinction between the owner and the business.
Partnership is an association of two or more persons for the purpose of engaging in business
for a profit.
Corporation is a fictitious being, recognized by law, that can engage in almost any type of
business transaction in which a real person could occupy himself. It operates under a charter
that is granted by the government.
Advantages and Disadvantages

of Sole Proprietorship
Advantages:
It is easy to organize.
The owner has full control of the enterprise.
The owner is entitled to whatever benefits and profits that accrue from the business.
It is easy to dissolve.
Disadvantages:
The amount of equity capital which can be accumulated is limited.
The organization ceases upon the death of the owner.
It is difficult to obtain borrowed capital owing to the uncertainty of the life of the organization.
The liability of the owner for his debts are unlimited.

of Partnership
Advantages:
More capital may be obtained by the partners pooling their resources together.
It is bound by few legal requirements as to its accounts, procedures, tax forms and other items.
Dissolution of a partnership may take place at any time by mere agreement of the partners.
It provides an easy method whereby two or more persons may enter into business each carrying
those burdens that he can best handle.
Disadvantages:
The amount of capital that can be accumulated is definitely limited.
The life of the partnership is determined by the life of the individual partners. When any partner
dies, the partnership automatically ends.
There may be serious disagreement among individual partners.
Each partner is liable for debts of the other partnership.

of Corporation
Advantages:
It enjoys perpetual life without regard to any change in the person of its owners, the
stockholders.
The stockholders of the corporation are not liable for the debts of the corporation.
It is relatively easier to obtain large amounts of money for expansion due to its perpetual life.
The ownership in the corporation is readily transferred.
Authority is easily delegated by the hiring of the managers.
Disadvantages:
The activities of the corporation are limited to those stated in its charter.
It is relatively complicated in formation and administration.
There is greater degree of government control as compared to other types of business
organization.
Capitalization of a Corporation
The capital of a corporation is acquired through the sale of stock. There are two principal types of stock.
Common Stock represents ordinary ownership without special guarantees of return.
Preferred Stock are guaranteed a definite dividend on their stocks. In the case the corporation
is dissolved, the assets must be used to satisfy the claims of the preferred stockholders before
those of the common stockholders. Preferred stockholders usually have the right to vote in
meetings, but not always.
Rights of Common Stockholders
Vote at stockholders meeting.

Elect directors and delegates to them power to conduct the affairs of the business.
Sell or dissolve the corporation.
Make and amend the by-laws of the corporation.
Subject to government approval, amend or change the charter or capital structure.
Participate in profits.
Inspect the book of the corporation.
Financing of Bonds
Bond is a certificate of indebtedness of a corporation usually for a period of not less than 10
years and guaranteed by mortgage on certain assets of the corporation or its subsidiaries. Bonds
are issued when there is a need for more capital such as for expansion of the plant or the
services rendered by the corporation.
Classification of Bonds
Registered Bond the name of the owner of this bond is recorded on the record books of the
corporation and interest payments are sent to the owner periodically without any action.
Classification of Bonds
According to the Security Behind the Bonds:
Methods of Bond Retirement
The corporation may issue another set of bonds equal to the amount of bonds due for
redemption.
The corporation may set up a sinking fund into which periodic deposits of equal amount are
made. The accumulated amount in the sinking fund is equal to the amount needed to retire the
bond at the time they are due.
The corporation may issue callable bonds. These bonds permit repayment of the principal
before maturity.
Value of a Bond
Sample Problems on Bonds
1.
A 10 year corporate bond has a face value of
Php5,000 and a bond rate of 8% payable
quarterly. A
prospective buyer desires to earn a nominal rate of
12% quarterly on investment.
What purchase price would the buyer be willing to pay? (php 4,573.49)
2. A bond with a par value of Php1,000 and with a bond rate of 16% payable annually is sold
now for
Php1,050. If the yield is to be 14%, how much should be the redemption
price at the end of seven years?
(Php 910.50)
Sample Problems on Bonds
3.
A bond issue of Php200,000 in 10 year bonds, Php1,000 units, paying 16% nominal interest in
semiannual payments, must be retired by the use of a sinking fund that earns 12% compounded
semiannually. What is the total semiannual expense?
4.
A man wants to make a 14% nominal interest compounded
semiannually on a bond
investment. How much should the man be
willing to pay now for a 12% compounded semiannually,
Php10,000 bond that will mature in 10 years and pays interest semiannually? (Php
8,909.89)
5.
A Php1,000 bond which will mature in 10 years and with a bond rate of 8% payable annually is
to be redeemed at par at the end of
this period. If it is sold at Php1,030, determine the yield at this
price. (7.56%)

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MODULE 1

Macroeconomics is the study of the entire system

Necessities and Luxuries

Consumer and Producer

Goods is defined as anything that anyone wants or needs.

Different Types of Goods

Producer Goods are those such as raw

materials and tools, used to make consumer

Supply and Demand

Demand it refers to the peoples willingness to buy a product or service.

change in quantity demanded as a

change in price and quantity demanded

Factors that Influence Demand

Factors that Influence Demand are:

Taste and preference

Price of Related Goods

Supply it is the willingness of a producer to manufacture goods.

Factors that Influence Supply

Factors that Influence Supply are:

Number of Producer and Sellers

Shortage the supply is less than the demand.

Types of Simple Interest

Exact Simple Interest simple interest in which the

exact number of days per month is

1 ordinary year = 365 days

Rate of Interest it is the cost of borrowing money.

m = 1 for compounded annually (every 12 months)

F/P and P/F Factors:

Sample Problems on Compound Interest

What amount will be accumulated by Php4,100 in 10 years at 6% compounded annually?

What effective annual interest rate corresponds to the following situations?

nominal interest rate of 10% compounded semi-annually

nominal interest rate of 6% compounded monthly

nominal interest rate of 8% compounded quarterly

Cash Flow Diagram

Types of Cash Flow Diagrams

P/A and A/P Factors:

F/A and A/F Factors:

annuity to be paid constantly in 60

Php10,000 payable for 5 years at 12%

Draw the cash flow diagram.

Select any convenient focal date.

Temporary focal date is used to convert deferred annuity to

Final focal date is used to obtained the required value.

Project all values to temporary focal date.

Obtain the final value.

made at the beginning of each

10% interest so that he would earn

To provide for the recovery of capital

To enable the cost of depreciation to be

which has been invested in physical

Physical Depreciation it is due to wear and tear of the asset.

Physical and Economic Life

Straight Line Method

Declining Balance Method

Double Declining Balance Method

Sum-of-Years Digit Method

Sinking Fund Method

Hour Output Method

Service Output Method

Straight Line Method

the depreciation charge during 3 years

the depreciation reserve accumulated at the end of 3

book value at the end of 3 years.